Tuesday, May 27, 2014

A forgotten diamond in the blind

Inaction is action. It's easier said than done.

By the same token, boring is rewarding. But it's hard to get oneself excited about boring stuff.

It's very satisfying to hunt for and uncover undervalued stocks. The thrill is hard to resist. But the goal of investing is not to indulge one's adventurous soul or to satisfy one's ego. The goal is to compound one's wealth. Very often, the real gems are something we already know. It's boring to recycle old ideas. Yes. But being boring makes money. It compounds.

I wrote about Advant-e (ADVC) in 2012. That was actually the first post on this blog. (Now looking at my records, I realise I actually started buying ADVC in 2011.) I won't repeat all the details here. You can go back to read about it yourself. At the time, I believed ADVC was a quality business, a hidden champion. It should comfortably deliver 15% return per annum for very long time. In a more favourable business environment, it wouldn't be a stretch to get 20% p.a. return. Share price was then $0.20 and P/E was about 10x.

Fast forward to today. Price is $0.40 and it is still trading at a multiple of 10x. In between, ADVC has distributed some very generous dividends. My total return (on a constant currency basis) is about 100%. Annualised return is about 30% p.a.

Numerous value bloggers have written about ADVC over the years. The most recent spike of blog posts was seen towards the end of 2013, when ADVC decided to stop filing statements with SEC, coupled with a reverse-split and a force cash-out for the investors with less than 10,000 shares. Some investors were pissed off, believing the entire exercise was unfair towards minority shareholders. When the CEO Jason Wadzinski controlled over 50% of the company, they had reasons to worry. Eventually, the company went dark as planned but the reverse-split was called off, of which the true reason will probably never be known.

Since then, the company has been forgotten.

I hold a different opinion. In 2012, I said Wadzinski was shareholder friendly. My stance hasn't changed throughout the going-dark incident. Remember this is effectively his company. If he wanted to pay himself big salaries but distribute no dividends, he could have done so. But he hasn't. From ADVC's history, what Wadzinski has said and what he has done in the past, he strikes me as someone with integrity.

When a company goes dark, apart from being less liquid, the worry is: what will happen to its dividend policy and reporting policy? Now we have the answer. On April 28th ADVC sent its shareholders a letter from the CEO with a condensed annual report, declared a 5% dividend and announced a share buyback up to ~6% of its market cap below $0.37.

While the company is definitely less transparent than it was, my assessment of its business hasn't changed. Its moat in its own turf in the grocery market is solid. And it's slowly making inroads into the automobile market and the healthcare market.

Monish Pabrai said in a recent interview the holy grail of investing is to identify compounders with hidden moats. That's superior to buying cheap assets at 40c on a dollar. He didn't elaborate why. But it's self-evident. Instead of constantly and actively searching for your next preys, you collect money from a compounder when you are snoring.

ADVC is one such little compounder. It is my benchmark (or in Buffett/Munger's vocab, my "cost of capital") when I assess other investment opportunities. "Should I buy XYZ, or should I buy more ADVC?" This is my way to avoid making further stupid mistakes.

Indeed, I've bought more.

p.s. I respect the company's decision not to make their financials public. If you want to have a glance of their 2013 numbers, you can simply buy a few shares and ask the company for a copy.

p.p.s. ADVC trades over-the-counter and is very illiquid. Be wary of pump and dump promoters. Be wary of bullish articles like this very one you've just read. :-)

(Disclosure: Long ADVC)